The Consumer Financial Protection Bureau gained a significant judicial victory this week involving a case about the constitutionality of the CFPB’s funding structure.

In a 7-2 ruling, the Supreme Court said the bureau’s funding is constitutional, triggering an array of reactions from the regulator, industry associations and auto finance experts.

After the decision, the CFPB said, “For years, lawbreaking companies and Wall Street lobbyists have been scheming to defund essential consumer protection enforcement. The Supreme Court has rejected their radical theory that would have devastated the American financial markets. The court repudiated the arguments of the payday loan lobby and made it clear that the CFPB is here to stay.”

While the bureau might be cheering the decision, American Financial Services Association president and CEO Bill Himpler noted that many questions remain.

“While there may be CFPB staff breathing a sigh of relief over this ruling, this Supreme Court decision does nothing to bring clarity or transparency for consumers, the consumer credit marketplace or Congressional oversight,” Himpler said. “The result may well be continued confusion over unclear CFPB guidance, ongoing uncertainty with rulemaking by blog post and selective enforcement actions, and an agency not bound by robust congressional oversight.

“We remain committed to work with Congress, the Biden administration and the CFPB on clear policies and a regulatory process that both protects consumers and their access to the credit products to meet their financial needs,” he continued.

Consumer Bankers Association president and CEO Lindsey Johnson offered a similar reaction.

“CBA is heartened that this important legal question has been resolved. The Supreme Court’s holding in favor of the CFPB’s constitutionality, however, should not be considered a popular endorsement of the CFPB’s recent and seemingly political rulemakings, many of which have skipped important legal requirements and have raised concerns under the Administrative Procedure Act,” Johnson said.

“Any agency, even if its funding is constitutional, is unfortunately capable of engaging in rushed and ill-conceived rulemakings, as the CFPB has recently,” she went on to say. “CBA looks forward to continuing to work with the CFPB, as we have for nearly 13 years, to further a safe and competitive financial marketplace.”

Background of case

The case involved the CFPB against Community Financial Services Association of America.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, officials recapped that the CFPB receives its funding through requests made by the CFPB director to the Federal Reserve, subject to a cap equal to 12 percent of the Federal Reserve’s revenues, rather than through the Congressional appropriations process.

On Oct. 19, 2022, a unanimous three-judge panel of the U.S. Court of Appeals for the Fifth Circuit ruled that the CFPB’s funding mechanism violated the U.S. Constitution’s Appropriations Clause and the separation of powers principles on which it is based.

The CFPB filed a petition for a writ of certiorari with the Supreme Court, requesting a review of the Fifth Circuit’s decision. Oral arguments for the case were heard by the Supreme Court on Oct. 3.

CBA explained that central to the arguments were whether the CFPB’s historically unique funding structure, which is “doubly insulated” from the congressional appropriations process, runs afoul of the U.S. Constitutional requirement that “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”

The bankers association said commentators in favor of the constitutionality of the CFPB’s funding were concerned a holding that the CFPB’s funding structure was unconstitutional would threaten the validity of all past CFPB actions, risking severe market disruption.

But the CFPB claimed the judicial win.

“Congress created the CFPB to be the primary federal watchdog protecting consumers from predatory and abusive practices in the financial sector. Since the CFPB opened its doors in 2011, it has delivered more than $20 billion in consumer relief to hundreds of millions of consumers and has handled more than 4 million consumer complaints,” the CFPB said.

“Today’s decision is a resounding victory for American families and honest businesses alike, ensuring that consumers are protected from predatory corporations and that markets are fair, transparent and competitive,” the bureau continued.

“This ruling upholds the fact that the CFPB’s funding structure is not novel or unusual, but in fact an essential part of the nation’s financial regulatory system, providing stability and continuity for the agencies and the system as a whole,” the CFPB went on to say. “As we have done since our inception, the CFPB will continue carrying out the vital consumer protection work Congress charged us to perform for the American people.”

Impact on auto financing

Fueled by this Supreme Court decision, experts at F&I Sentinel cautioned finance companies and other product providers about the renewed zeal the CFPB might now have.

“The Supreme Court’s decision to uphold the CFPB’s authority is a milestone in the ongoing effort to protect consumers and maintain fair financial markets. For auto lenders, this is a crucial moment to take stock of their compliance practices and make necessary improvements. By doing so, they can not only avoid regulatory pitfalls but also contribute to a healthier, more transparent financial system that benefits everyone,” F&I Sentinel said through blog post after the decision surfaced.

“Auto lenders, the message is clear: it’s time to reassess and reinforce your compliance programs. The CFPB’s watchdog role is secure, and your commitment to compliance will be a cornerstone of your success in the evolving regulatory landscape,” the compliance firm continued.

To help finance companies get on the right path, F&I Sentinel reiterated four recommendations, including:

—Funding practices: F&I Sentinel said finance companies should ensure that their funding processes are transparent and in full compliance with regulatory standards.

“This includes clear disclosures to consumers about loan terms and conditions and having in processes in place to ensure funding practices aren’t allowing for bad conduct to occur,” experts said.

—F&I products: F&I Sentinel insisted there must be a more proactive approach taken toward the funding and servicing of F&) products, such as GAP waiver, extended warranties and service contracts.

“The days of funding all F&I products that are sent to a lender are over,” experts said. “More and more lenders are being held accountable for the content, marketing and sale of F&I products. Hence, auto lenders must take a dynamic compliance approach ensuring that only products meeting regulatory compliance standards are funded, and that cancellation processes as well as the disbursement of consumer refunds are made within the requisite time frames.

“Having an independent assessment process that is not tethered to the product administrator is best practice to ensure that you are staying on the right side of regulatory requirements,” they continued.

—Consumer complaints: F&I Sentinel offered a suggestion on how to handle this part of customer relations.

“With the CFPB’s proven track record in handling consumer complaints, auto lenders should prioritize responsive and effective complaint resolution mechanisms,” experts said. “Establishing a robust system for addressing consumer concerns can help mitigate risks and enhance trust.”

—Training and education: F&I Sentinel closed by saying regular training for staff on compliance requirements and consumer protection laws is essential.

“Keeping employees informed about regulatory changes and best practices can prevent violations and foster a culture of compliance,” experts said.